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An Economic Stimulus Package for North Carolina

President Bush’s approval of a $161 billion economic stimulus package raises some interesting questions regarding how state lawmakers might respond to the current economic slowdown. The key component of the federal stimulus plan is a one-time tax rebate capped at $600 for individuals and $1,200 for couples, plus $300 per child. The basic idea is that putting more money into the hands of taxpayers – as opposed to the government – is good for the economy.

As U.S. House Speaker Nancy Pelosi (D-Calif.) explained, the tax rebates will “inject confidence and consumer demand, promote economic growth, and create jobs” and “help our economy recover and grow.” Has Pelosi suddenly bought into President Bush’s economic agenda? Or does she simply see the stimulus package as a politically popular move? In either case, the fact is both parties now seem to believe that "tax relief" is good for American families and for the U.S. economy.

As state sales tax revenue growth begins to slow, North Carolina might want to consider passing an economic stimulus package of its own. We can do one better than the federal stimulus package, though. Rather than handing out money in the form of tax rebates, the General Assembly should instead reduce regressive taxes that burden the poor. Here, Senator Richard Burr (R-NC) is on the right track by calling for a 10-day, sales-tax-free holiday. Targeted, permanent tax cuts would be an even better idea. Such cuts would provide a long-term boost to the economy while eliminating the hassle and expense associated with sending rebates to millions of citizens.

Regressive taxes hurt the poor more than the rich. Examples of such taxes include the local grocery tax, the gas tax, and the sales tax. Only 18 states, including North Carolina, collect a sales tax on groceries. Eliminating this regressive tax would put an estimated $248 million in the hands of consumers. Cutting the gas tax would also help stimulate the state’s economy. North Carolina’s gas tax is higher than any state in the Southeast, except Florida (which doesn’t have an income tax). At 30.15 cents per gallon, the state gas tax is well above the national average of roughly 23 cents. If we lowered this regressive tax to 25 cents per gallon, motorists would have $305 million more to spend.

Finally, the now permanent portion of the “temporary” sales tax should be eliminated. North Carolina’s average statewide sales tax of 6.75 percent is higher than 31 states and much higher than Virginia’s 5 percent sales tax. Lowering the sales tax back to 6.5 percent would put another $258 million into the hands of consumers who can use it to support their families and jumpstart the economy.

With these three recommendations in place, the General Assembly could inject more than $800 million into the state’s economy. As opposed to a tax rebate, lowering select taxes is a better way to stimulate the economy. To begin with, a tax cut is more efficient than a rebate because it merely lets taxpayers keep their own money – as opposed to “rebating” tax dollars already collected. The Tax Foundation estimates that for every dollar the government collects in taxes, Americans spend 20 cents in compliance costs. (In other words, an $800 million tax rebate would actually cost $960 million.)

The second advantage of these targeted tax cuts is that they are good both for the poor and for the economy as a whole. According to Speaker Pelosi, “Economists estimate that each dollar of broad-based tax cuts leads to $1.26 in economic growth.” An $800 million tax cut would thus grow the economy by more than $1 billion. Not only that, but these targeted cuts would give the economy a sustained burn, instead of a one-time surge.

Finally, tax rebates smack of a government handout. Tax cuts, on the other hand, encourage people to take ownership over their own finances.

Kudos to Congress and President Bush for their bipartisan work on the tax rebate package. But even better than a tax rebate is a tax cut. For state leaders worried about an economic slowdown closer to home, cutting regressive taxes that hurt the poor would be a good place to start.

D. Kyle Ward is a policy intern at the Civitas Institute in Raleigh (nccivitas.org).